Reference no: EM132749304

Question: Problem 1: Presented below are three independent situations.

1) During 2019, Dub Inc. became involved in a tax dispute with the government. Dub's attorneys have indicated that they believe it is probable that Dub will lose this dispute. They also believe that Dub will have to pay the government between P800,000 and P1,400,000. After the 2019 financial statements were issued, the case was settled with the government for P1,200,000. What amount, if any, should be reported as a liability for this tax dispute as of December 31, 2019?

2) On October 1, 2019, Class 101 Chemical was identified as a potentially responsible party by its Environmental Regulatory Agency. Class 101's management along with its counsel have concluded that it is probable that Class 101 will be responsible for damages, and a reasonable estimate of these damages is P6,000,000. Class 101's insurance policy of P9,000,000 has a deductible clause of P500,000. How should Class 101 Chemical report this information in its financial statements at December 31, 2019?

3) Maggie Inc. had a manufacturing plant in Vienna, which was destroyed in the civil war. It is not certain who will compensate Maggie for this destruction, but Maggie has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant but more than its book value. How should the compensation be reported in the financial statements of Maggie Inc.?

Required: Answer the question at the end of each situation.

Problem 2: The following situations relate to Theoretical Phys Ed Company.

1) Theoretical Phys Ed provides a warranty with all products sold. It estimates that it will sell 1,000,000 units of its product for the year ended December 31, 2019, and that its total revenue for the product will be P100,000,000. It also estimates that 60% of the product will have no defects, 30% will have major defects, and 10% will have minor defects. The cost of a minor defect is estimated to be P5 for each product sold, and the cost for a major defect is P15. The company also estimates that the minimum amount of warranty expense will be P2,000,000 and the maximum will be P10,000,000.

2) Theoretical Phys Ed is involved in a tax dispute with the tax authorities. The most likely outcome of this dispute is that Theoretical Phys Ed will lose and have to pay P400,000. The minimum it will lose is P20,000 and the maximum is P2,500,000.

Required: Determine the amount to record as provisions, if any, for Theoretical Phys Ed at December 31, 2019.